FOMC Minutes Signal June Rate Hike

FOMC Minutes Signal June Rate Hike

"Policymakers disagree on where the neutral funds rate is and, therefore, how much more tightening will be necessary, but for now there's broad agreement that the "gradual" normalization can continue", says Ian Shepherdson, chief United States economist at Pantheon Macroeconomics.

There was uncertainty over "the range of possible outcomes for economic activity and inflation", depending on the Administration's trade policy. But the Federal Reserve isn't anxious about it - yet.

The US dollar's index against a basket of six major currencies last traded at 93.414, down from a five-month high of 94.058 set on Monday.

In its May meeting, the Fed kept the interest rates unchanged, in line with market expectation, while expressing confidence that inflation is near its 2-percent target. Instead, the curve is flattening and economists are now debating whether this levelling of short and long term rates is a sign of the market calling last orders on the current economic cycle and pricing in an eventual recession - which would explain lower interest rates further out along the "curve". The minutes showed that most Fed policymakers believe another interest rate hike is probably necessary, and that the Fed would accept inflation rising above its goal for a limited period.

The lira plunged to a record low against the dollar before reversing course to trade more than 2 percent higher after the Turkish central bank raised interest rates by 300 basis points in an emergency move. That would be the second rate hike of 2018.

There is a chance the Fed might have to get even more aggressive in hiking rates in an effort to slow down the economy and inflation.

The price index for personal consumption expenditure (PCE), an inflation gauge preferred by the Fed, rose 2 percent from a year ago in March, the biggest increase since February 2017 and meeting the Fed's 2-percent inflation target.

The dollar is likely to stay in a holding pattern ahead of the Fed minutes, with the focus on further details related to the inflation outlook, said Heng Koon How, head of markets strategy for UOB in Singapore.

A number of Fed officials suggested that uncertainty surrounding trade issues could dampen business sentiment and spending.

President Donald Trump has threatened tariffs on as much as US$150 billion in Chinese imports, with China vowing to retaliate in kind. Asian shares also fell on Thursday, prompted by a USA government national security probe into auto imports which is the force behind the proposed new tariffs.

President Donald Trump has sought to stake out a tougher approach on trade in an effort to achieve his goal of dramatically shrinking America's huge trade deficits, which he has blamed for the loss of millions of US factory jobs. The potential for higher Chinese tariffs on key USA agricultural products could hurt the nation's competitiveness in the long run, members said. The next meeting will take place on June 12-13.

The minutes were released with the usual three-week delay.

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